In late October 2002, Sir John Sunderland, chairman and CEO of Cadbury Schweppes, contemplated the future of his global confectionery and beverage company. Over the previous decade, the company had made several acquisitions to complement its portfolio of chocolate, soft drinks, sugar confectionery (candy), and gum. Now it was considering a bid for Adams, the number two player in the worldwide gum business and, with its Halls brand, a leader in sugar confectionery.
After researching the acquisition for many months, his Chief Strategy Officer Todd Stitzer and the Adams deal team were approaching the point of no return. Sunderland knew that they would have to bid more than $4 billion to have any chance of winning Adams. Should they go ahead with the offer and if so, was all debt financing of the bid appropriate? At this lofty price, how certain could the Cadbury Schweppes’ team be that they could create value? He wondered, was the strategy behind the acquisition sound, and could the leadership team successfully execute an acquisition and integration plan of this magnitude?
History of Cadbury Schweppes Cadbury Schweppes was formed by the 1969 merger of a beverage company started by Jacob Schweppe in 1783 in Geneva, Switzerland and a chocolate business started by John Cadbury in Birmingham, U.
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K. in 1824. While Schweppes was best known for its mixers, such as tonic water, the firm was the number three competitor in the beverage business after Coca-Cola and PepsiCo. Cadbury Schweppes was the number four player in the global chocolate business, having exited related businesses such as biscuits (cookies) in a restructuring in the 1980s.
This had focused the company on its core beverage and confectionery brands, the former of which was fortified by the acquisitions of carbonated soft drink (CSD) brands Canada Dry and Sunkist (1986), Dr. Pepper and Seven-Up (1995), and Orangina (2001) while also expanding in non-CSD beverages including Mott’s (1982), Hawaiian Punch (1999), and Snapple (2000). In confectionery, the firm acquired non-chocolate businesses such as Trebor (1989), Bassett (1989), and Hollywood, its first chewing gum acquisition (2000). (Exhibit 3) Early in 2002, Cadbury Schweppes ventured deeper into gum with the $307 million acquisition of Danish company Dandy.
Although many of these acquisitions were regarded as successes, Snapple and Orangina were publicly perceived as management integration challenges, and Cadbury Schweppes was eager not to repeat its mistake of leaving newly acquired companies alone for too long. In fact, even in 2002 the headquarters of two of the three U. S. beverage businesses were within 20 miles of each other and had not yet been consolidated. Geographically, the beverage business was focused on North America, Europe, and Australia, having sold off beverage brands in 160 other markets in 1999. Since the acquisition of Dr.
Pepper and Seven-Up in 1995, the business had increased steadily due to good sales growth and delivery of cost synergies. However, by 2001–2002, growth was slowing—Cadbury Schweppes remained a distant third in the U. S. soft drink business, with 9. 5% of total volume, and had lost market share to leaders Coca-Cola (27. 1%), Pepsi (26. 4%), and Nestle over the previous two years.
The company was seventh in the much more fragmented Western European soft drink market. [ii] Cadbury Schweppes was slightly ahead of Pepsi in terms of market share in Australasia, but was dwarfed by Coca-Cola which had five times its share. iii] While Coca-Cola and Pepsi had attacked with an “unprecedented number of recent product launches” such as Vanilla Coke and Sierra Mist, Cadbury Schweppes had launched only a single new Dr. Pepper product, Dr. Pepper Fusion, during the previous seven years. Despite the new product introduction, Dr. Pepper growth was slow and as Pepsi bottler’s delisted Seven-Up in favor of Sierra Mist, Seven-Up’s volume fell 5%. Moreover, analysts expected volumes to fall by double digits during the next year. [iv] In confectionery the firm had a wide geographic scope covering Europe, Asia, Africa, and Australia as well as Canada and Argentina.
The exception was the U. S. where Cadbury Schweppes had sold the rights to its confectionery brands to Hershey in 1988. [v] As a result, royalties for Cadbury products were capped in the U. S. except for the sale of Cadbury Creme Eggs, which did most of their volume at Easter. Overall, operating margins in confectionery had declined from about 13% in 1998 to 12% in 2002.